STMicroelectronics N.V.

Ladies and gentlemen, welcome to the STMicroelectronics third quarter 2025 earnings release conference call-in live webcast. I am Moira, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jérôme Ramel, EVP Corporate Development and Integrated External Communication. Please go ahead. Thank you, Maura.

Thank you, everyone, for joining our third quarter 2025 financial result call. Hosting the call today is Jean-Marc Chéry, ST President and Chief Executive Officer of Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO, and Marco Cassis, President Analog, Power and Discrete, MEMS and Sensors Group, and Head of STMicroelectronics Strategy, System Research and Application and Innovation Office. These live webcasts and presentation materials can be accessed on STInvestor's website. A replay will be available shortly after the conclusion of this call. This goal will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filing for a full description of these risk factors. Also, to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chéry, ST President and CEO.

Thank you, Jérôme. Good morning, everyone. And thank you for joining ST for our Q3 2025 earnings conference call. I will start with an overview of the third quarter, including business dynamics. I will then hand over to Lorenzo for the detailed financial overview. And we'll then comment on the Outlook and conclude before answering your questions. So, starting with Q3. We delivered revenues at $3.19 billion, $17 billion above the midpoint of our business Outlook range, with higher revenues in personal electronics, while automotive and industrial performed as anticipated, and CECP was broadly in line with expectations. All end markets but automotive are now back to year-on-year growth. Growth margin of 33.2% was slightly below the midpoint of our business output range, reflecting product mix within automotive and within industrial. Excluding impairments, restructuring charges, and other related phasal costs, diluted earnings per share was $0.29. During the quarter, we managed to work down inventories both in our balance sheet and in distribution and we generated a positive $130 million free cash flow. Let's now discuss our business dynamics during Q3. In automotive, during the quarter, we grew revenues about 10% sequentially, in line with expectations, driven by whole regions except Americas. Our book-to-bill came above parity. We expect to grow mid-single digits in the fourth quarter compared to the third quarter, which would be the third consecutive quarter of sequential growth. During the quarter, we continued to execute our strategy for car electrification. We had wins with both silicon and silicon carbide devices for electrical vehicle applications. such as traction inverter and onboard charger designs. One new application where we see silicon carbide being used is inverters for full active suspension. Here we add a design wheel with a module solution for a key Chinese electrical vehicle maker. Another key element is a switch to electronic fuses. to support zonal and domain architectures, both in 12V and 48V. Here we headed to our pipeline of designs for our infuse controller with leading electrical vehicle makers and qualified our products for volume ramp-up. Other wins in the quarter included microcontrollers for DC-DC management in electrical vehicle powertrain, body control modules and HVAC systems across multiple vehicle models. In car digitalization, we are executing our microcontroller product roadmap with a strong lineup of new solutions across both our Herm-based Stellar and MSTM32A product families. Design-in activity continues globally, with engagement from both large-scale automotive OEMs and tier 1 suppliers. In legacy applications, we had several significant wins based on our smart power technologies in applications where we lead, such as airbags, steering and braking solutions. With our automotive grade sensors, we continue to see strong designing momentum and growing opportunities. Wins in the quarter included MEMS sensors for road noise cancellation and door control, and both MEMS and imaging sensors for in-cabin monitoring. Shortly after our results announcement in July, we announced that we entered in a definitive transaction agreement for the acquisition of NXP's MEMSensor business for a purchase price of up to $950 million in cash, complementing and expanding our current leading MEMSensor technology and product portfolio. The transaction remains subject to customary closing conditions, including regulatory approvals, and is on track to close in H1 2026. In industrial, revenues were in line with expectations, showing increase of 8% sequentially and 13% year-over-year, back to year-on-year growth for the first time since the third quarter of 2023. Importantly, inventories in distribution further decreased. In Q4, we expect to go over new low single digits sequentially as we continue to decrease inventories in distribution. During the quarter, we saw strong designing activity for our Power Analog portfolio across a range of applications. These included factory automation, power systems, medical equipment, motor control, white goods, solar inverters, and metering. We also continue to expand the use of our industrial sensors in robotics, including robots and commodes, and humanoid robots. an area where we see demand for significant number of sensors. We also had wins in medical devices like insulin pumps and fall detectors. In embedded processing, we continued to win designs with our STM32 microcontrollers for a wide range of industrial applications, with products from all parts of the portfolio, from high-end to wireless, to specialized functions. These included power supply and optical modules for AI servers, industry automation and robotics, energy storage, home appliances, metering and wire goods. We have a full pipeline of new products and software coming to market in the next quarters and you will hear more about this during our STM32 Summit in November. For general purpose microcontroller, we grew revenues both sequentially and year over year, and we are on the right trajectory to return to our historical market share of about 23%. For personal electronics, third quarter revenues were above our expectations, up 40% sequentially, reflecting the seasonality of our engaged customer programs, but also increased silicon content, which also translated into year-over-year growth. Further strengthening of our unique position as a sensor supplier with both MEMS and optical sensing solutions, we signed a new license agreement with MetaLens This new agreement broadens our capability to produce advanced metasurface optics, leveraging ST's 300mm semiconductor and optics manufacturing capabilities. This opens up new opportunities from smartphone applications like biometrics, LiDAR and camera assist, to robotics, gesture recognition and object detection. Revenues for communication equipment and computer peripherals were broadly in line with expectations and up 4% sequentially. For AI data centers, we had multiple wings with silicon and silicon carbide devices for high-power solutions. Although, last quarter we announced that we are working closely with NVIDIA on a new architecture for 800V DC AI datacenter leveraging our PowerPro 3.0 by combining silicon carbide, gallium nitride and silicon-based technologies with advanced custom design at both chip and package level. I am pleased to underline that we recently completed full power testing on a prototype GAN-based solution, successfully demonstrating over 98% energy conversion efficiency. Silicon Photonics is another key technology for future data centers and AI factories. ST now heads the Starlight Consortium, a collaborative R&D program across the full value chain with key suppliers and customers to develop high-speed optical solutions for data centers, AI, telecommunications, and automotive, from the substrate to the final products. During Q3, we have seen an increased demand for Photonics ICs prototypes to be launched in the next quarter and beyond in our 300mm wafer fab. This confirms that Photonics ICs will be a revenue growth driver for ST in the near term. In Low Earth Orbit Satellites, we have further strengthened our leadership position in the rapidly growing low orbit satellite broadband market by beginning shipment to a second global customer. Leveraging our winning combination of BISEMOS technology for front-end modules and panel-level packaging for user terminals. Our business in this segment is well-positioned for steady growth, driven by several satellite constellations. Now, over to Lorenzo, who will present our key financial figures.

Thank you, Jean-Marc, and good morning, everyone. Let's start with a detailed review of the third quarter, starting with the revenues on a year-over-year basis. By reportable segment, analog products, MEMS, and sensor was up 7.0%, mainly due to imaging. Power and discrete products decreased 34.3%. Embedded processing revenues grew 8.7%, mainly due to general-purpose MCU. RF and optical communication declined 3.4%. Buy and market. Industry increased by about 13%. Personal electronics by about 11%. communication equipment and computer peripherals by about 7%. Automotive was still decreasing by about 17%, but showing some improvement in respect to the 24% decline recorded in the second quarter. Year-over-year sales to OEMs decreased 5.1%, while revenues from distribution increased 7.6%, back to year-over-year growth for the first time since the third quarter 2023. On a sequential basis, Power & Discrete was the only segment to decrease by 4.3%. All the other segments grew led by analog products, MEMS and sensors, up 26.6%, with embedded processing up 15.3%, and RF and optical communication up 2.4%. All our end markets grew, led by personal electronics, up by about 40%, followed by automotive, up by about 10%. with industrial and communication equipment and computer and peripheral up respectively by about 8% and 4%. Turning now on profitability. Gross profit in the third quarter was $1.06 billion, decreasing 13.7% on a year-over-year basis. Gross margin was 33.2%, decreasing 460 basis points on a year-over-year, mainly due to lower manufacturing efficiencies, negative currency effect, lower level of capacity reservation fees and, to a lesser extent, the combination of sales price and product needs. Total net operating expenses, excluding restructuring, amounted to $842 million in the third quarter, broadly stable on a year-over-year. They were better than expected, reaffecting notably our continued cost discipline with the first benefits of the resizing of our global cost base. For the fourth quarter of 2025, we expect the netto tax to stand at about $950 million, increasing quarter on quarter. due notably to calendar days effect. This will lead the net OPEX for the full year 2025 to decline by 2.5% compared to 2024, despite unfavorable currency effect. As a reminder, these amounts are net of other income and expenses and exclude restructuring. In the third quarter, we reported $180 million operating income, which included $37 million for impairment, restructuring charges, and other related phase-out costs. These reflect impairment of asset and restructuring charges predominantly associated with the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding this not recurring item, which is partially not cash, Q3 non-US GAAP operating margin was 6.8%. with analog products, MEMS and sensors at 15.4%, power and discrete at minus 15.6%, embedded processing at 16.5% and direct optical communication at 16.6%. This quarter, 2025, the net income was $237 million compared to $351 million in the year-ago quarter. Diluted earnings per share were $0.26 compared to $0.37. Excluding the previously mentioned non-recurring items, non-US GAAP net income and diluted earnings per share were respectively $267 million and $0.29. Net cash from operating activity decreased 24.1% on a year-over-year basis in the third quarter to $549 million. net capex was $401 million compared to the $565 million in Q3 2024. Free cash flow was a positive $130 million in the third quarter compared to the $136 million in the year-ago quarter. Inventory at the end of the third quarter was $3.17 billion, a reduction of about $100 million compared to the end of the second quarter. Days' sales of inventory at the quarter end were 135 days, slightly better than our expectation, and compared to 166 days for the previous quarter and 130 days in the year-ago quarter. Cash dividends paid to stockholders in the third quarter totaled $81 million. In addition, Estee executed a share buyback of $91 million. Estee maintained its financial strength with a net financial position that remained solid at $2.61 billion at the end of September 2025. reflecting total liquidity of $4.78 billion and total financial debt of $2.17 billion. It is worth to mention that in the course of the third quarter, we repaid, fully in cash, $750 million for the first tranche of our 2020 convertible bond. Now back to Jean-Marc, who will comment on our outlook.

Thank you, Lorenzo. Let's move to our business outlook for Q4 2025. So we are expecting revenues at $3.28 billion, an increase of 2.9% sequentially, plus or minus 350 basis points. we expect our gross margin to be about 35% plus or minus 200 basis points, including about 290 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global trade tariffs compared to the current situation. The midpoint of this outlook translates in full-year 2025 revenues of about $11.75 billion. This represents a 22.4% growth in the second half compared to the first half, confirming signs of market recovery. Growth margin for the full year is expected to be about 33.8%. Finally, to optimize our investments in the current market conditions, we have reduced our next capex plan now slightly below $2 million for full year 2025 compared to a range of $2 to $2.3 million previously. To conclude, in the fourth quarter, we expect to report further sequential revenue improvements with revenues now broadly stabilized on a year-over-year basis, as well as an increased gross margin, while continuing to decrease inventories in distribution. We are on the right path to improve our gross margin in the medium term through the reduction of unused capacity charges, the reshaping of our manufacturing footprint, and, definitively, our product mix improvement. In a context marked by signs of market recovery, our strategic priorities remain clear, accelerating innovation, executing our company-wide program to reshape our manufacturing footprint and resize our global cost base, which remains on schedule to deliver the targeted savings, and strengthening free cash flow generation. Thank you and we are now ready to answer your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question only. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of François Bouvigny from UBS. Please go ahead.

Thank you very much. My first question is on the top line. I mean, you get it plus 3% quarter on quarter, 2.9 to be precise. It seems to be below your seasonal at, you know, plus 7% quarter on quarter, if I'm not wrong. I mean, you can remind us maybe the seasonality. Can you explain us as to why, you know, you are a bit below seasonal in Q4 for the top line and the drivers? And then secondly, on the gross margin, I mean, it's nice to see this improvement of 180 basis points quarter on quarter. How sustainable is this gross margin? I mean, if you have any seasonality product mix, you know, should we extrapolate this dynamic of 35% into the first half of 26? Just trying to understand, you know, the work you have done on gross margin, how sustainable it is at least in the first half of 26 would be great. Thank you.

We'll take the revenue seasonality and the gross margin. On the revenue seasonality of Q4, basically there is two effects. The first effect is on automotive. Because on automotive, even if we will grow on a quarter over quarter 6%, but here on a year it is still minus 12%. and why because okay 80 percent of this performance gap is explained by two reasons it is a decrease our capacity reservation fees compared last year and you know it is overall volume of one important customer of st in the field of electrical vehicle So this is what is explaining why in Q4 we are below the seasonality. The second explanation to be below the seasonality in Q4 is because in industrial we continue to decrease the inventory in distribution, so our POP is significantly below the POS. However, on the other, let's say, verticals, like personal electronics, communication equipment, computer peripherals, and other legacy on automotive or industrial in the field of power and energy, basically, okay, we are at the seasonality we expect.

About gross margin, in Q4 the gross margin, the main positive driver, let's say, when we look at the sequential increase of our gross margin moving from the result of Q3 and the expectation of Q4, is clearly improved manufacturing efficiency. That is, if you remember, let's say in the first half and also in Q3, we were impacted by a significant negative impact on the manufacturing efficiency that was due to the very low level of production that we had, especially in the first half of the year. There is also some improvement in terms of unused charges. When we look, let's say, to how we will move in the first half of next year, we have to remind that clearly there are two negative effects that we will impact moving forward. One effect is related to the fact that there will be some reduction entering 2026 of the capacity reservation fees. And definitely you know that in the first part of the year, there is some seasonality in terms of our revenues, let's say, in respect to the second part of the year. And then don't forget that there is also the renegotiations Even if we see today not a significant drop, we think that it will be something in the range of low single digit with single digit decline. On the positive side, we will have, let's say, still continue positive impact on manufacturing and reduce, continue to reduce the level of unsaturation. At this stage, it's a little bit too difficult to size, let's say, the level of gross margin because we'll depend also on the level of the revenues. But this is directionally the trend that we will have moving and entering in the next year. Thank you. Thank you very much.

Moira, next question, please.

The next question comes from the line of Joshua Buchalter from TD Cohen. Please go ahead.

Hey, guys. Good morning, and thank you for taking my question. Maybe to follow up on that last one, could you maybe spend a couple minutes talking about how you're thinking about managing utilization rates right now? It seems like You know, you're taking things back up. Are you at the point where you feel comfortable building a little bit of inventory downstream and or on your balance sheet, given the comments? You know, you mentioned you're going into some negative seasonality into 1Q, but it sounds like utilization rates are going to be up in the fourth quarter and the first quarter. Could you maybe just spend a couple minutes talking about what you're seeing there? Thank you.

Now, for the inventory, clearly, let's say, as you have seen, we try to keep control on the level of inventory. In the current quarter, we think to stay substantially stable in number of days. This is our expectation in respect to Q3. But the positive point is that entering in the next year, clearly, let's say, as I said, that there is our seasonality, the normal seasonality, that means that in general, the inventory in the first half of the year is a little bit higher, also in number of days, in respect to the second part of the year. Then you have to consider that entering next year, let's say, we start to have some decrease in terms of overall capacity linked to the fact that we started to have some benefit coming from our reshaping of the manufacturing infrastructure. This will somehow mitigate the level of unused moving in 2026. this is uh let's say uh the the one of the drivers that we see in terms of uh progressively improving in terms of the utilization rate together of course with uh with some growth in terms of revenues do you have any okay got it thank you um yeah thank you um i was hoping to ask about the industrial segment um so it looks like book to bill went back to parity

Anything major going on there? Any geographies that are better or worse? And maybe how would you categorize the health of the general purpose microcontroller business underneath there? Basically, should we assume we're sort of shipping back to normal now? Thank you.

In industrial, we see different dynamics when we go on some subsegment. we see a growth and dynamic more pronounced for power energy. Basically, all sub-segments of this one are growing. And it is growing more definitively than the smart industrial, means the factory automation. We can say that robotics is so far good. But overall, the factory automation is really, really soft. More than all the industrial, which are volume-driven, means consumer-driven, the hub cycle is pretty soft. So the takeaway we can have on the industrial is what is related power, energy, infrastructure, and robotics is now upcycle pretty pretty solid what is related volume and consumer is a very soft upcycle looks like inventory are digested but the visibility is a pretty short is pretty low so that's the reason why the customer are still putting order on the on short term Here, our decision is to continue to manage the distribution very closely and continue to adjust our POP below their POS forecast to continue to decrease inventory. Inventory on general purpose microcontroller came back to what we classify as normal, which means a level of months of inventory that enables short-term business. We still have some pockets of over-inventory on some specific products, like PowerDiscrete or sometimes General Purpose microcontrollers, but we are going in the right direction. So this is the dynamic we are seeing on the industrial market.

Thank you, Georges.

Moira, next question, please. The next question comes from Tristan Guerra from Bayard. Please go ahead.

Hi, good morning. I wanted to see how linear is the reduction in capacity reservation fees that you expect in 2026 from the 150 to 100 million reduction that you're looking at for this year, is there a big drop in Q1, or is it going to be pretty linear throughout all of next year?

In terms of capacity reservation fees, it works in this way. Let's say substantially the capacity reservation fees that are ruled by contract with the car makers are quite constant over the year in terms of million dollars. Yes, you can have a little bit higher, a little bit lower during the various quarter of the year, but they are not linearly going down. Let's say they are substantially quite flattish, I would say quarter after quarter. Clearly when the contract expires, that is at the end, for instance, of 2025, many of these contracts are expiring, but then yes, you have the decline. And then the decline remains the level that you get in the first quarter will remain substantially similar all over the other quarters. So this is the way that it works. So what we will see in Q1 will be this reduction. And then after that, we will stay stable, more or less stable during the course of 2026, the level of capacity reservation.

Do you have another one? Yeah, thanks. Just a quick follow-up. Of course, it's going to depend on end demand, but any sense of when you think POP can get back in line with point of sales in industrial next year?

Globally, pop will be aligned with the pos each time our product line reach the target of inventory we don't want to exceed this is okay a lesson we learned from the past and and now we are really disciplined on on this point so you cannot see the POP overall. We have to look the POP in detail by product line. And I repeat, no, our microcontroller is pretty well aligned. So now our POP is really driven by the hand demand POS and by region, I have to say, where China, APEC, America are pretty okay and Europe is still soft. Well, and for the other product line, okay, we are still in a mode where the POP is below the POS. However, we expect to go back normal in H1 2026, most likely Q2.

Thank you, Tristan. Thank you very much. Moira, next question, please.

The next question comes from Stefan Huri from Oddo BHF. Please go ahead.

Yes, good morning everyone. I have a first question about the CAPEX budget because you're adjusting downward the CAPEX for the end of this year. I guess this is in the course of managing your capacity by the end of the year and also an expectation of 2026 but what are you reducing at the moment and how do you look at 2026 in terms of capex at the moment where you're transforming your tool from 200 millimeter to 300 millimeter thank you we reduce the capex in fact there is the two dynamics there is a dynamic driven by ocean

where we want to close the 200 mm farm, so Agrat and Krul. And of course, we need to put the capex to increase the capacity at the right level in Agrat 300 and in Krul 200. Here, we have not specially limited the dynamic because the demand is pretty solid. But then the other main important action is the CAPEX for 200 mm conversion on silicon carbide, because we will close the 150 mm, but here we have limited the CAPEX driven by the demand, which is below what we expected one year ago. So the main impact of the capacity limitation is on the silicon carbide. But then after, it's more spread across test assembly, where we clearly adjust the capacity of what we need and no more. And generally speaking, it's more adaptation to mix rather than volume increase. Do you have a follow-up, Stéphane?

Yes, a small one. Just to ask you if with the Nexperia situation, you do receive phone calls or rush orders from your customer, or you see nothing for the moment? Thank you.

We are sure that the carmaker and the tier 1 of the automotive industry have clearly taken the lesson of the previous short-term period and they have enabled many sources to prevent such issues. And of course, as the other semiconductor players, STMicro is part of this process. Well, more than that, I have no comment.

Okay, thank you.

Thank you, Stéphane. Moira, next question, please.

Next question comes from Didier Chemama from Bank of America. Please go ahead.

Yes, good morning. Thanks for taking my question. I have a first question maybe on your inventory and related to that, on what you're thinking about in terms of factory loading for the first half. I think one of your USP already announced last week or earlier this week, sorry, that they would reduce factory loadings to reduce inventory, especially in the context of a shallow recovery. So I think it looks like your inventory are tracking about 30, 40 and 50 days above where they used to be. So are you thinking about taking down further factory utilization first off, I guess?

But in terms of inventory, I would say that, yes, you're right, it's a little bit higher in respect to what was our hysterical ending of the year. It is a little bit higher. But at the end, I think that when we look next year, I think the dynamic of our... We will continue to keep under control the inventory. The dynamic of the inventory will, let's say, be, as usual, a little bit increasing during the first half of the year to go back to decreasing the second part of the year. In terms of, let's say, unloading and factory utilization, I think that moving in 2026, there will be an improvement. Notwithstanding, we will continue to keep under control our inventory. This improvement, as I was saying before, is due to the fact that we do expect some, let's say, increase in terms of our revenues, looking at the evolution of the market. And the other element is that we start to, let's say, reduce capacity in some of our FAPs. The one that we aim, let's say, to progressively close in the course of, by the end of 2027. So we will start, of course, to move out some equipment and this will reduce the capacity and this will reduce the level of unused FAPs.

Got it. And then I think last quote, you said that the gross margins were impacted by, if I remember correctly, roughly 70 basis points of the 140 at 70 basis points of FX headwinds and 70 basis points of, you know, related to basically the manufacturing transition from 6 to 8 and 8 to 12. Is there any of that in Q4?

No, no, let's say moving from Q2 to Q3, let's say the effects was overall an impact of 140 basis points, Q2, Q3, let's say related to the combination of these two effects, but very different. Let's say something in the range of 120 basis points was the effects, and around 20 basis points was the impact of these extra costs, let's say, related to our programs. Now, let's say in this quarter, clearly the FX is a minor impact because it's quite stable. It's a little bit negative because we move from 1.14 to 1.15. It's ranging in the range of 20 basis points, a negative impact. It's not so material. While these extra costs related to the activity to reduce the capacity and to start to move products from one side to the other is impacting our gross margin expected for Q4 between 30 to 40 basis points. This is so the 30% impacted by something ranging between 30 to 40 basis points of extra cost.

Understood. And just a clarification, because it wasn't clear, your OPEX guide for Q4 is 915, right? It's not 950.

No, no, it's 915. And this is driven by the fact that we have a negative calendar days impact for two reasons. The calendar is longer. And the vacation in Europe is, let's say, less than what we benefited in the course of the previous quarter. On the other side, we will continue with our, let's say, program to reduce account in expenses. And this will bring us some benefit. Thank you so much.

Thank you, Didier. Moira, next question, please.

Next question comes from Sandeep Dishpande from J.P. Morgan. Please go ahead.

Yeah. Hi. Good morning. Thanks for letting me on. My question is regarding the trend into the first quarter. I mean, you normally have a weaker first quarter and that's Would you expect the utilization rates to go down? And given all the factors you've talked about in the earlier questions, there is a downtick associated with the capacity reservation fees. Should we expect your gross margin in the first half of the year to be weaker than where it is at the moment? And I have a quick follow-up after that.

Yeah, in terms of gross margin, it's true that in the first half, the seasonality is not favorable. And yes, there are the lower capacity reservation fees. On the other side, in respect to where we stand today, our expectation is that the level of unused charges will decrease. The decrease is not due to the fact that we aim to increase our inventory. There is some seasonality in our inventory, but the decrease, as I was trying to explain before, it's mainly driven by the fact that we start to reduce the capacity. So it means that we will start to some transfer of equipment and these, or let's say, not utilization of equipment due to the fact that we progressively in some fact we started to reduce the the the capacity aimed at the end let's say to move to close this dispatch so we we will start and this will progressively impact our our our capacity and for some extent our unused capacity

Thanks. I mean, a follow-up to that, essentially quickly on that would be, is your number of days in Q1 lower than in Q4 or is it anything different? And my main question is about 2026 overall, I mean, on the revenue. Do you have any new engaged programs with your customers which will improve revenue significantly either in first half or into the second half particularly?

Now, I confirm, Sandip, that in Q1, Q1 will be shorter in terms of the number of days than Q4. Q4 is longer in terms of days than the normal 91, and the calendar next year, Q1, will be shorter than the normal 91. It's a little bit the same trend that we have seen this year, let's say, in terms of calendar. So, yes, I confirm that there is a shorter calendar in Q1.

First of all, about next year, 2026, Q1, with the current visibility we have of the loading of the backlog, we have seen in Q3 and we are seeing today, But we don't see a specific reason why we will not be at the usual seasonality of Q1 revenue versus Q4, which is, generally speaking, really slightly above minus 10%. Well, then moving forward, of course, we will, but it's evident, depend on the market dynamic. But I would like to say that for 2026, first of all, in the second half, we will clearly see the normalization of inventory everywhere. We really expect that in H2 2026, we will have no over-inventory. Point number one. Point number two, next year, compared to 2025, the silicon carbide will be a year of growth, because 2025 is a year of transition, where basically we have cumulative headwinds related to one specific customer, some programs not going at the expected speed in Europe, and you know we are not especially still present in China, but SICK next year will be a growth driver. Well, then after we have our exposure to fast growing segment, clearly that already give us sign of growth like EDAS with our main customer that already provided some, let's classify upside and MEMS as well. And definitely, one point is our increasing content in terms of value and silicon in our main customer. So, all in all, we do believe that Q1, we have no sign that the seasonality will be impacted by other factors that we do not control. And in H2, we will be as well as the usual seasonality of growth, H2 versus H1. Do we grow more like here? Because this year we grow 23% and the usual seasonality is 15% H2 versus H1. Well, here we need to have a little bit more booking in Q1 and in Q2 to confirm. So my takeaway is, yes, we will have, let's say, idiosyncratic growth driver on top of the, let's say, upcycle of the market that we are seeing today, even if this upcycle market of automotive and industrial should be classified at this stage, soft, okay, and with some segment pretty dynamic like the one related to infrastructure.

Thank you. Thank you so much. Very clear. Moira, next question, please.

The next question comes from the line. No, Jean-Arthur, from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking the question. I just wanted to go back, go to the power discrete business where your margins are still very weak at minus 15% in the third quarter. So what can be the drivers to improve that? You talked about silicon carbide improving in Q3, I'm sorry, in 2026. But would that revenue come mainly from your Sanan JV to Chinese customers? And will that help your overall profitability given low utilizations in Europe? And do you need to take any further action to try and improve the profitability there in powder streets given the kind of competitive environment in that industry and then my follow-up is just a small clarification on the pre on a previous answer your 30 to 40 basis points of manufacturing inefficiency from the conversion and shutting down etc does that continue till you reach the end of that journey which is when you fully close down your 200mm and transition to 300mm or does that drop off before that? Thanks.

So Lorenzo will comment about the improvement driver of power discrete profitability. While Marco will comment on the dynamic of power and discrete revenue, because as I have already anticipated in my last answer, clearly silicon carbide for us in 2025 is a transition period. Well, yes, I can take it.

Clearly, well, I will let Marco to explain what are the drivers, but at the end, let's say clearly next year, we do expect a recovery in terms of the top line. At least we let, but you know, this year we were impacted by a significant inefficiency in our manufacturing. environment for the power and discrete in general, and for the silicon carbide in particular, due to the fact that we were working a very low level of saturation for these webs. Clearly, there are the following drivers that we expect to recover in terms of profitability. Having a higher level of revenues clearly will help to better load our infrastructure. then don't forget that silicon carbide it will be the first to move let's say in the course of next year from the the six inch to the 200 millimeter to the eight inch and this will bring clearly let's say some positive in the medium term in term of profitability Moving up in terms of revenues will improve significantly our expense to sales ratio that today clearly has been impacted by the fact that revenue are quite depressed. So at the end, these are the main drivers that we see together with the fact that we are improving and we are moving to the next generation of silicon carbide that give also some benefit in terms of performance for what concerns, let's say, the profitability. Before to pass to Marco, I just clarify the point of this extra 30 basis points on gross margin. Yes, this is mainly related to the duplication of masks, related to the, let's say, qualification of processes. But this will continue. The amount will be more or less in this range over for sure the next part of 2026 and probably also in the second part because we will continue with this program. This will be probably peaking in the first half of 2026 and then it will go down. But yes, this is something that we need to expect to have as we have this activity to migrate our products from one FEB that is going to be closer to another FEB.

okay so we take on the dynamics so we'll have basically two dynamics in 2026 that will help to restart the growth first of all uh we'll who, as Jean-Marc has said, in the first half of 2026, will keep reducing and will be clean in terms of inventory, empowering this grid. Here I'm speaking mainly about the non-celiac carbide portion, and this will allow the market dynamics next year to restart having a near-over-year growth. Specifically, on oscillium carbide as Jean-Marc has already anticipated, 2025 is a transition year. Meaning is that we are experiencing lower volumes and inventory correction from our main customers. I would like to underline this is happening while we still are maintaining stable our commercial and contractual level market share. This is happening since the beginning of 2025. And during 2025, these dynamics is not yet offset by Europe and China. So there is yet not strong contribution from electrification, from the electrification programs in Europe and China. During the next year, we will start seeing growth in these two regions that will help the 2026 overall growth of the silicon carbide versus 2025.

Yes, thank you very much.

Thank you, Jonathan. Thank you, everyone. This is ending our call for this quarter. So thank you for being with us today. And we remain here at your disposal should you need any follow-up questions. Sorry for the one that didn't have time to ask a question there. Thank you very much.

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